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Trust funds and lockboxes: They still don't get it

Many critics of Bush's Social Security plan still lack a basic understanding of the principles involved (and yes, I'm talking about you, Josh Marshall, although there are many others as well.) All they understand is that the plan comes from the Bush White House, so it must be bad, and they are going to oppose it with any argument that's handy, even if said arguments are fallacious or self-contradictory.

In today's post, Marshall has great fun mischaracterizing the "conservative" position that all government bonds are "worthless pieces of paper." Do a quick search through his post, and you'll find variations on such high wit repeated about a gajillion times.

That's a grievous distortion of Bush's position, of course. Let's be clear: treasury bonds are not worthless paper. They represent an extremely sound investment option for you, me, or the Chinese government. Nevertheless, it's senseless for the government (or any other entity) to "invest" in its own debt instruments.

Sure, we've all done it from time to time -- borrowed twenty bucks from the cookie jar and replaced it with a note promising to pay it back. There's nothing wrong with that per se, unless and until you start regarding this practice as an "investment." Then if you begin doing it systematically, on a regular basis, as a plan to "save" for the future, well, you're just nuts... or Josh Marshall.

Make no mistake, this is not about whether or not the government will default on these obligations. The point is much more fundamental than that. When the borrower and the lender are the same entity, it's still a dumb idea, whether the borrower defaults or not.

Josh Marshall, as a status quo liberal, thinks investing payroll taxes in government bonds is just fine. He's entitled to that opinion, of course. But astonishingly, he ends the piece by championing Al Gore's "lockbox" idea!

Do you understand what Al Gore was talking about now with the 'lockbox'?

Yeah, exactly.

Uh, Josh? Al Gore pushed for a lockbox precisely to avoid the current bond-financed system. He understood that the FICA surpluses were being diverted into general revenues as fast as they came in and he understood that this posed a serious threat to the system's long-term solvency.


I certainly sympathize with the view of Gore and others, that the real problem is Congress' systematic "raiding" of the Social Security trust fun, but I do have a small problem with the term "raid." More precisely, Social Security gives Congress the money and says, "Here, spend this. Just pay us back later, okay?" That's sort of what it means to purchase a Treasury bond.


Al Gore wanted to amend the current system, although he offered few details as to how the funds in his lockbox would be invested. President Bush has a specific (if partial) remedy for these problems, but the majority of the public seems to oppose his plan. That would be fine, except that there is abundant evidence that most people don't even understand the details of our present system and its fundamental problems. Frankly, it's hard to see how the system can ever be fixed so long as there is such widespread misunderstanding concerning the basics -- even on the part of people who should be smart enough to know better (*cough*Josh Marshall*cough*)


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You said:

By that rationale any investment of the funds in any area is mutually contradictory as well. In fact if we take the idea of a lockbox to this extreme the only thing we can do with the cash is stick it in the proverbial mattress as any form of investment puts the money at risk.

I know you'll argue that your concept of the lockbox only applies to internal government investment, that external investment of the funds is a different animal. But I think if you honestly examine your premise you'll have to concede that I'm right here.

So if I am right then it seems that the plan to use private accounts also contradicts the concept of a lockbox. At least the stringent interpretation of one that you've put forward.

Now if we take a loosen interpretation and allow the concept of investing these funds in something with a guaranteed return, then we are left with government securities. There is no other source of guaranteed return on inverstment. Corporations reinvest in their own stock, so why can't government reinvest in it's own bonds?

I don't think you believe the government ever intends to default on these bonds, you just object on principle. But if you really look at it this is the safest way to invest the money. The only thing safer would be to take all of that money out of play and stick it in a hole in the ground. That's just effectively taking a huge segment of our economy completely out of play.

Not a good idea. But that is the inevitable conclusion of your definition of a lockbox.

Yeah, Godzy, you make a very good point. I think that's precisely why Gore was always short on specifics when it came to exactly *how* the lockbox funds would be invested. While I support his concept in principle, there are problems when it comes to implementation, as you point out.

But you *know* my answer. Private accounts address the same problem in a much more viable way -- a distributed lockbox, if you will. Or millions of tiny, individual lockboxes. :-)


This whole argument is confusing because of perspective, i.e. you have to look at things from the borrower's perspective, and then turn around and look at things from the lender's perspective. Every time you chastise the current system because you say it is improper for the borrower and lender to be the same person, you somewhat oversimplify the issue.

Whether you like it or not, the SS Trust Fund and the U.S. Treasury ARE different accounting entities, each with its own balance sheet and income statement. This kind of accounting goes on in corporate America all the time when a holding company owns two or more subsidiaries. Subsidiary A may borrow money from Subsidiary B, and it will appear as inflows on A's records and outflows on B's records, but the overall records for the holding company will be undisturbed. We did this type of accounting at a company I worked for which owned many branches. If a branch "sold" something to one of the other branches, we had to make sure that the income statement for the holding company "eliminated" these "false" sales from the records, although at the branch level it was proper for it to be considered a sale.

In other words, there is nothing improper about this relationship. And there is really nothing wrong with this "raiding" of the SS Trust Fund. From the perspective of the trust fund, they are investing in U.S. Treasury bills. From the perspective of the U.S. Treasury, they are selling Treasury bills, generating cash for government operations. These investments are the safest around, because they are backed by the "full faith and credit of the U.S. government".

The whole idea of a "lockbox" is a gross oversimplification anyway, and maybe even plain wrong. Do you REALLY want the SS money lying there, undisturbed, not earning any interest? I hope not, as that would be BAD stewardship (or trustee-ship) of the money. Some people claim the U.S. government could just "add" interest to the SS Trust Fund. NO WAY! That would really be a net outflow of money from the Treasury, and the budget deficit would balloon to unmanageable proportions. (Some would argue we're already there :-)

For the record, I like the idea of private accounts, as long as we retain the choice. I'd like the chance to beat the returns offered by the T-Bills. But people are going to have to stop using terms like "raiding" and "lockbox". The problems of the SS monies are not caused by any "raiding". The problems are caused by demographic changes - the number of people putting money into the system is dwindling, and the number of people taking money out is growing. By the year 2042 (or 2052), this will cause the SS Trust Fund to not have enough money to pay full benefits. In any event, you could call it "raiding" if you took money in the SS Trust Fund and invested it in the stock market or whatever. It is a meaningless word in this situation, because the proper accounting for the money (its custodianship) is not being challenged.

Pres. Bush was wrong to start dialogs on privitization before recommending ways to shore up the system. He doesn't want to reduce benefits, or increase the SS age. He definitely does not want to increase the amount of income subject to SS tax ($90,000 max in 2005), lest fellow Republicans call that a tax increase, and Bush (like many GOP) would rather cut off his willy than recommend that. But in my opinion, one of the three items must occur. I like the idea of gradually increasing the age for those under 45, while simultaneously lifting that wage cap.

Tracy, I never suggested that there was anything improper about a particular government entity holding government bonds. The problem sets in, as I said, when you begin to regard this as a systematic investment strategy.

I also agree that there are real problems, in practice, with the idea of a lockbox, although I support the principle behind it. But let me ask you a question: How is saving the money at zero interest any less desirable than earning interest which we, the taxpayers, will have to pay ourselves?

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